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FORBES: Why Is Florida The Number One Destination For Kentucky Residents?

After nine months of deliberation in 2013, Kentucky’s Blue Ribbon Commission on Tax Reform – assembled by Governor Steve Beshear and the twelfth such group since 1982 – put together a list of 54 recommendations that would overhaul the Bluegrass State’s tax code. Drawing from this list, Governor Beshear formally announced his 22-point legislative plan (dubbed “Kentucky Competes”) on February 4, with the goal of enacting meaningful tax reform aimed at strengthening the state’s economy, workforce, and businesses. In addition to reducing individual income tax rates and eliminating two of the current six tax brackets, the proposal would also reduce the corporate income tax (from 6 percent to 5.9 percent), lower the state’s wholesale tax on alcohol products, and phase out inventory and some tangible personal property taxes – all while raising an additional $210 million in revenue for the state.

So, what is the problem with this plan? Let’s start with the excise tax change.

As we all know, Kentucky is a significant exporter of alcohol (particularly bourbon) and tobacco. The state has some of the highest alcohol tax rates in the nation, but a relatively low tobacco tax. Under the governor’s proposed plan, the wholesale tax on wine, beer, and spirits would be significantly reduced with an effective total tax cut of $16.1 million, but the increase in cigarette taxes (from 60 cents to one dollar) and the new 20 percent tax on e-cigarettes would result in a tax hike of $125.3 million. And that’s a generous estimated revenue figure, given that tobacco tax collections are volatile. Illinois’s recent tobacco tax increase, for example, pulled in $100 million less than Governor Pat Quinn’s estimations, due to people going outside the state to purchase these products. Continuing with the theme of consumption-based taxation: How does the change in sales tax fare?

Photo Credit: Kentucky.com

Unfortunately, not as well as it appears on its surface. While broadening the base of services subject to the 6 percent sales tax, the plan subjects labor for installation, repair, and maintenance of personal property to this tax, as well as some personal and commercial services. The total price tag of this expansion is a tax hike north of $250 million.

At least the individual income tax reduction makes Kentucky more competitive, right?

While Governor Beshear’s plan simplifies tax brackets and lowers rates, it does not address the issue of municipal income tax rates in Kentucky. Eight cities currently levy an income tax on residents and non-residents – a tax structure similar to that of Detroit, Michigan. Louisville, for example, levies a personal income tax rate of 2.2 percent for residents and 1.45 percent for non-residents, resulting in a total state tax burden of 8.2 percent for those living within city limits. That’s just 0.62 percent less than New York, the most heavily taxed state in the U.S. A reduced income tax rate of 5.75 percent for middle-class families making over $50,000 a year does little to alleviate the total tax burden once city taxes are factored into the equation.

According to Internal Revenue Service data contained with How MoneyWalks, Kentuckians are leaving their state for more tax-friendly states such as Florida, Tennessee, North Carolina (which reduced income tax rate in 2013 to 5.8 percent), South Carolina, and Texas. Based on calculations fromwww.SaveTaxesByMoving.com, a sales representative (wholesale and manufacturing, technical and scientific products) making $89,440 (Bureau of Labor Statistics) a year could earn over $800,000 more in his or her lifetime by moving from Louisville, Kentucky to Jacksonville, Florida. Is it any wonder why Florida is the number one destination over the past 18 years for working wealth from the Bluegrass State?

Despite several pro-growth plans contained within this proposal, it merely shuffles tax rates to cover a broader base and raise revenue. Municipal income tax rates are adding an extra layer to the overall tax burden felt by residents and workers alike. Additionally, the implementation of tax incentives and exemptions for certain corporations and businesses makes the state less attractive for all businesses seeking to invest in the state’s economy. If Governor Beshear truly wants to enact meaningful tax reform similar to his counterparts in Wisconsin and North Carolina, his “Kentucky Competes” plan needs to go further. Otherwise, Kentucky will continue to lose its thunder to states like Tennessee and Florida.